Referring to the information given, when will payback occur? To justify the purchase of a new release of information tracking system, Health Information Management Services wants to calculate the new system's payback period. The cost to operate the current system is $25,000 per year. The proposed cost of the new system for the first year is $35,000 with continuing operating costs per year of $15,000. An increase of $10,000 per year in billing is anticipated with the new system because of .the addition of a billing component to the release of information tracking component. The data are summarized in the table below.

Cumulative difference in costs

Question

Referring to the information given, when will payback occur? To justify the purchase of a new release of information tracking system, Health Information Management Services wants to calculate the new system's payback period. The cost to operate the current system is $25,000 per year. The proposed cost of the new system for the first year is $35,000 with continuing operating costs per year of $15,000. An increase of $10,000 per year in billing is anticipated with the new system because of .the addition of a billing component to the release of information tracking component. The data are summarized in the table below.

Cumulative difference in costs

Quizplus · Accepted Answer

Payback period is the time taken for the cumulative cost savings of a project to equal its initial cost. 
To calculate payback period, we need to determine how many years it will take for the savings from the new system to equal the cost of the new system. 
In this case, the cost of the new system for the first year is $35,000 and the additional billing component is expected to increase billing by $10,000 per year. 
Therefore, the cumulative difference in costs after year one will be $25,000 ($10,000 increase in billing - $15,000 operating cost of new system). 
To calculate the payback period, we divide the cost of the new system ($35,000) by the cumulative difference in costs after year one ($25,000), which gives us 1.4 years. 
Therefore, payback will occur in the second year, when the cumulative difference in costs will be $40,000 ($25,000 from year one + $15,000 operating cost of new system). 
Any choice beyond the second year does not accurately reflect when payback will occur.

Referring to the Information Given, When Will Payback Occur? to Justify